Never Mind the Gap

The Wall Street occupiers are settling in to the public consciousness now, for better or worse. Somewhere in the chanting is an inchoate worry about the gap between rich and poor. According to the Congressional Budget Office (CBO), between 1979 and 2007, income grew by:

• 275 percent for the top 1 percent

• 65 percent for the next 19 percent

• Just under 40 percent for the next 60 percent

• 18 percent for the bottom 20 percent.

This seems like a damning picture. Even if we were to argue that some of these data don’t account for government goodies at the bottom (such as entitlements and tax credits), it worries a lot of people.

But in fact we should stop worrying about the so-called “gap” between rich and poor. To make that case from my perch here in the humbler part of the spectrum, I suggest engaging in a thought experiment:

If you were dictator for a day and you could choose between two states of affairs, which would you choose?

A: Permanently institute a policy that significantly reduces the gap between rich and poor.

B: Permanently institute a policy that makes everyone better off, including the poor.

Notwithstanding this readership a lot of people out there would choose A. Consider a few examples of folks I’d put in Group A, which we’ll call “the Atavists.” (Those who are unnerved by “the gap” are not so much enlightened as in the grip of an inborn hoarding taboo. Most of us share this taboo to some degree because we’re all human. But for some of us it burns in the DNA and becomes expressed as indignation. That’s why I call Group A “Atavists.”)

Famous atheist Sam Harris says, “Yes, we must cut spending and reduce inefficiencies in government. . . .But this does not mean that we can ignore the astonishing gaps in wealth that have opened between the poor and the rich, and between the rich and the ultra-rich. Some of your neighbors have no more than $2,000 in total assets (in fact, 40 percent of Americans fall into this category); some have around $2 million; and some have $2 billion. . . . Each of these gaps represents a thousand-fold increase in wealth.” Surely he means net worth, not total assets.

The New Yorker’s James Surowiecki believes “there’s a yawning chasm between the professional and the plutocratic classes, and the tax system should reflect that. A better tax system would have more brackets, so that the super-rich pay higher rates.”

Nobel laureate economist Joseph Stiglitz shares a similar view in Vanity Fair: “Some people look at income inequality and shrug their shoulders. So what if this person gains and that person loses? What matters, they argue, is not how the pie is divided but the size of the pie. That argument is fundamentally wrong.”

What ties these perspectives together?

Atavists have a couple of things in common. First, they share an automatic response any time they perceive a social ill: Tax the rich. This elixir is offered before any other treatments for what may be deeper, underlying diseases—diseases of which some inequality may be a symptom.

Then let us entertain a rather seditious question: Before deploying another IRS agent, why not first fix any policies that cause wealth disparity? Whether we identify with group A or B, we shouldn’t tolerate transfers from poor to rich, and yet if we open our eyes, examples of such transfers are everywhere:

• Corporate Welfare. From Wall Street bailouts to agribusiness subsidies to “economic incentives” giveaways by states, politicians are doling out corporate welfare at every level of government. (Solyndra comes to mind.)

• Regressive Regulation. Excessive regulation makes goods and services more expensive for everyone and raises the costs of starting a small business. Such policies deny poor people opportunities many rich can afford.

• Loophole Labyrinth. Our tax code is complicated, and it is easier for wealthier people than others to purchase the energies of CPAs and tax lawyers to find loopholes.

• America’s Pyramids. Local boondoggles like light rail and sports arenas mean higher sales taxes, a burden that falls disproportionately on the poor. (Developers make out like bandits.)

• Medicare Monstrosity. Why should struggling young people have to fund the health care costs of richer elderly people in Boca Raton? Medicare requires just such transfers.

• Cadillac Care. Duke Law professors Clark Havighurst and Barak Richman write: “[T]he U.S. health care system operates more like a robber baron than like Robin Hood, burdening ordinary payers of health insurance premiums disproportionately for the benefit of industry interests and higher-income consumer-taxpayers.” Read: People with good jobs get nice tax exclusions while the working poor have to fend for themselves in the individual market where the cost of insurance is not deductible from income.

I could go on. “Progressive” policies that have the side effect of enriching the wealthy at the poor’s expense are just necessary evils, right? Besides, they say, it’s easy to mitigate the effects of those policies: tax more and redistribute!

But why not stop all this epicyclical thinking? Why not make the rules apply to everyone equally instead of tilting the tax code more? Why shouldn’t the first thought be to reduce the burdens of the State on the poor? And why not let value creators get rich honestly so they continue to offer things people want?

To the Atavist, it doesn’t matter whether you’re a maker or a taker. You can be John Mackey, who offers wholesome foods to health-conscious consumers, or Jeffrey Immelt, who gets rich by lobbying government for favors and contracts. If you’re superrich it’s all the same. What roils the Atavist is the very existence of the rich. Individuals, with their unique contributions, get reduced to slogans or plot-points on a distribution graph.

Venture capitalist Kip Hagopian picks up on this problem when he concludes: “The flaw in virtually all of the intellectual arguments on the issue of the progressive income tax . . . is a lack of appreciation for how income is determined.” Indeed, in a truly free market, for there to be any wealth to redistribute, there has to have been an initial “distribution,” which is a prosaic way of saying somebody—through effort and ability—had to create the wealth to start with.

Let’s call those who would choose alternative B the “Better-offs.” This group wants to improve the conditions of the poor even if that means the rich get richer. According to the Better-offs, things improve when it’s possible for successful investors and entrepreneurs to get rich. (This assumes they don’t use government to gain their wealth.)

Differences in Perspective

Between the Atavists and the Better-offs, there are five major differences in perspective.

1. Harming the rich or helping the poor. Concern about the conditions of poor people is not the same as worrying about how much rich people have. Our thought experiment teases out this difference. More straightforwardly: Would you improve the conditions of the poorest people modestly if it meant making the top 1 percent richer? “No” suggests one cares more about what the rich have than what the poor lack. An Atavist’s primary concern is equality of outcome.

All my life I’ve heard Latin America described as a failed society (or collection of failed societies) because of its grotesque maldistribution of wealth. Peasants in rags beg for food outside the high walls of opulent villas, and so on. But according to the [CIA], income distribution in the United States is more unequal than in Guyana, Nicaragua, and Venezuela, and roughly on par with Uruguay, Argentina, and Ecuador. Income inequality is actually declining in Latin America even as it continues to increase in the United States. Economically speaking, the richest nation on earth is starting to resemble a banana republic.

Gasp. A banana republic?

Language like “grotesque maldistribution” isn’t helpful. If any sense can be brought to such a phrase it would come in the “how” questions of the “distribution”—namely, how did the rich get rich? Creating value or bribing officials? Common sense diffuses Noah’s misuse of the Gini index, the standard measure of income inequality. If you define a banana republic in terms of the gap, the United States, Hong Kong, and Singapore are all banana republics. By the same logic, then, North Korea, Venezuela, and Myanmar are veritable utopias. Measuring the wealth gap in a country doesn’t tell us anything about levels of poverty or opportunity. It only tells us the statistical spread between richest and poorest.

2. Win-Lose or Win-Win. Despite the protestations of a couple of Nobel laureates who should know better, the market is not a zero-sum arrangement. All this discussion of the gap obscures the fact that whenever people engage in voluntary exchange, all parties benefit. Recall Stiglitz above: “So what if this person gains and that person loses? What matters, they argue, is not how the pie is divided but the size of the pie.” This straw man doesn’t look like anyone I know. The whole point of a free economy is that exchange is mutually beneficial. Only outside the market (or in a government-rigged market) does one party gain because another loses. In such cases, only one of four things could have happened: force, theft, fraud, or some variation of these sanctioned by government. Wealth transfers—whether from poor to rich or rich to poor—are inherently zero-sum. That means someone has to lose in order for someone else to gain. Better-offs want a “win-win” society. So it’s not just a question of the size of the pie, but how the pie gets baked.

3. Static Statistics or Real People. Sam Harris laments that 40 percent of Americans have a net worth of less than $2,000. One problem with this factoid is that about a quarter of the population is under 18, which leaves about 15 percent of adults with low net worth.

I don’t know many kids with a net worth over $2,000, but I’m comfortable with the fact that my five-year-old has little more to his name than some Legos and Wii games. Otherwise the remaining individuals in this low-net-worth group may have wildly different circumstances. There could be those with high incomes but debt, college kids with little besides ramen noodles and a laptop, or people who gambled flipping houses in ’08. There are some really destitute people out there, to be sure. But we can’t simply appeal to shoddy statistics as if they were, well, Scripture.

Steven Horwitz has explored data on wealth distribution more deeply. He says it’s true that the poor’s share of total income today is less than 30 years ago. But that doesn’t matter, says Horowitz. Total income is larger today. So the poor’s income is still greater than in the past. Absent government doing counterproductive things like stimulus and quantitative easing, the total almost always gets bigger over time. Statistical snapshots can also be misleading because most people are upwardly mobile. That doesn’t mean there aren’t people who get stuck in the lowest income bracket throughout their lives. It means there are far fewer such folks than critics like Harris care to admit.

4. Income or Well-being. A minute of work today buys you a whole lot more than it did 20, 50, or 100 years ago. Poor people enjoy phones, fridges, TVs, food, and a far higher standard of living because their purchasing power is greater.

In 1920 a working stiff had to labor 37 minutes at the prevailing wage to buy a half-gallon of milk. In 1997 our working stiff only had to work seven minutes. To buy a pair of Levi’s, one had to work 10.5 hours. In 1997? Three hours, 24 minutes. And in 1997 it took nine minutes to buy one MIPS (million instructions per second) of computing power. No computing product was available in 1920. Zoom out from any pessimism about the near term, and things look better. Competition among firms to serve customers yields continuous improvement across tax brackets. The really big gains, though tough to measure, have gone to the poor. Philosophical economist Deirdre McCloskey says:

[A] rich man cannot, after all, eat much more than his chauffeur can, speaking of sheer volume and nutrients. Nor can he wear right now more than one pair of Italian designer trousers, speaking of mere leg-covering ability. Nor can he live in more than one enormous room at a time, speaking of gross roofage and wallage.

With just a little perspective the poverty picture changes. By historical standards our poorest quintile today is much better off than at any other time in human history.

5. Compulsion or Compassion. Maybe we should think of a positive-sum society as a happy byproduct of good institutions that protect freedom and property, as opposed to a policy goal per se. The original thought experiment is designed to reveal people’s deeper commitments. Atavists, for example, are comfortable with compulsory compassion: If you’ve got it and someone else needs it, the State should take it. Better-offs see things differently. Most think of compassion as a value, not a policy. Compassionate acts flow from those who hold those values, which can’t be passed by Congress or enforced by IRS agents.

Now that we’ve identified these gaps in perspective, what do they tell us?

All this fretting about the gap is a big blinking distraction. For when we pull back the moral mantle, concern about the gap between rich and poor reveals a kind of aesthetic fetish. For all the talk of “social justice,” it’s hard to ground an Atavist’s concerns in anything like concern for the poor. The further away from indignation about the rich an Atavist moves, the closer he gets to becoming a Better-off. Ask yourself honestly: Are you worried about the poor? Or are you simply averse to wealth accumulation? An honest answer could start a more productive conversation about wealth and want.

ABOUT

Max Borders is the editor of The Freeman and director of content for FEE. He is also cofounder of the event experience Voice & Exit and author of Superwealth: Why we should stop worrying about the gap between rich and poor.

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December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.